NJ Superior Court Refuses Inheritance Tax Appeal of Domestic Partnership

NJ Supreme Court denies inheritance tax appeal

The New Jersey Supreme Court recently decided not to hear the appeal case filed by the federal pension beneficiary of a domestic partnership couple. According to a Law 360 report, Claudette A. Lugano was denied state inheritance tax exemption as a domestic partner because the Court ruled that she did not meet the requirements of the exemption in accordance with New Jersey state law.

Lugano’s argument for the state’s inheritance tax exemption

In Lugano v. Director, Division of Taxation, Lugano argued to the court that she was entitled to receive exemption from the state’s inheritance tax because she was a recognized domestic partner. According to a report a New Jersey firm specializing in elder law, Lugano’s point was that she had lived with her domestic partner for eight years. Her partner was also a federal employee, and thus the couple was required to file a form with the federal government to designate their relationship. After Lugano and her partner filed that form with the federal government, they were under the assumption that they had fulfilled the New Jersey requirements to designate their relationship as domestic partners.

The NJ court decides not to hear the appeal

After the initial case, the New Jersey Tax Court ruled that Lugano and her partner had not, in fact, filed the necessary forms required under the state Domestic Partnership Act. Therefore, the court held that Lugano would be required to pay the state’s inheritance tax as a Class D beneficiary of her domestic partner’s federal pension benefits.

The Appellate Division of the Superior Court of New Jersey then used this decision as the basis for declining to hear the appeal case. In its decision to throw out the appeal, the court asserted that the Tax Court was accurate in its decision that Lugano does not qualify for the inheritance tax exemption due to the fact that the couple did not fill out all the necessary forms, including an affidavit for domestic partnership within New Jersey.

Lugano had assumed that a domestic partnership declaration submitted to the Federal Reserve Bank should be sufficient to receive the tax exemption. However, the Superior Court ruled that this was only sufficient to be classified as a common law or de facto marriage, which was rejected by the state legislature for inheritance tax exemption. In turn, the Court also ruled that the New Jersey law is not applicable for federal pensions.

The ramifications

As a result of the decision not to hear the appeal, Lugano will be forced to pay more than $100,000 to the state of New Jersey as a Class D beneficiary, which comes with a 15 percent tax on inheritance, according to Forbes contributor Peter J Reilly, a certified public accountant.

From a broader perspective with domestic partnership couples, it is important to note that individuals who filed as couples for tax purposes with their companies prior to the domestic partner law will need to file an affidavit for their relationships. Otherwise, the partnership will not be recognized.